TreeHouse Foods Inc (THS) 2005 Q4 法說會逐字稿

Good morning, and welcome to the TreeHouse Foods Fourth Quarter Investor Relations Conference Call. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and can generally be identified by the use of words, such as “may,” “should,” “could,” “expects,” “seek to,” “anticipate,” “plan,” “believe,” “estimate,” “intend,” “predict,” “project,” “potential,” or “continue,” or the negative of such terms and other comparable terminology. These statements are only predictions. The outcome of the events described in these forward-looking statements is subject to known and unknown risks. Uncertainties and other factors that may cause the Company or its industry’s actual results, levels of activity, performance, or achievement to be materially different from any future results, levels of activity, performance, or achievement expressed or implied by these forward-looking statements. TreeHouse’s registration statement on Form 10 discusses some of the factors that could contribute to these differences. You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this presentation. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in its expectations or its regard thereto, or any other change in events, conditions, or circumstances on which any statement is based.

This call is being recorded.

At this time, I would like to turn the call over to the CEO of TreeHouse Foods, Mr. Sam K. Reed. Please go ahead, sir.

Good morning all, and welcome to our TreeHouse. Today we will review the fourth quarter and a summary of 2005. We will also provide a strategic overview and earnings guidance for the coming year 2006. As usual, Dave Vermylen and Nick McCully are with me this morning. We are also joined by Dennis Riordan, TreeHouse’s new CFO. Dennis and Nick will tag team the financial analysis and Q&A today. As has been previously announced, Nick is moving from Finance to Corporate Development, where he will focus primarily on growth strategies and acquisitions.

Now let us turn to a review of 2005, followed by the outlook for the following year, the coming year. Fourth quarter performance was in line with the guidance we provided last November. While revenues exceeded plans, margins remained under severe cost pressures while we developed price increase and productivity improvement programs to counter cost inflation.

Excluding share-based compensation expenses and other operating expenses, which Nick McCully will discuss in more detail, operating income approximated $60 million for the year. Although buffeted by escalating input costs in the fourth quarter, we initiated an urgent and sweeping agenda of reform to stabilize TreeHouse going forward. Four key accomplishments stand out.

First, we have undertaken a comprehensive series of price increases, effective in the first quarter, to recapture margins lost in the last several months to energy and other cost inflation. These price increases have been almost universally accepted as the correct measure by our customers, given the rise in fuel, transport, and packaging costs.

Next, we have installed a new senior management team at our operating unit – Bay Valley Foods. Our purpose in doing so is threefold – to establish a united team dedicated to our common cause; to promote visibility, the early recognition of problems and their swift resolution; and to consolidate both sales and marketing, as well as operations and supply chains in the hands of proven leaders.

Thirdly, we instigated a series of planning and control measures to anticipate and provide early warning of customer service issues, operations problems, and variances to plan. We have immersed ourselves fully into the details of pickles and powder.

Lastly, we have reexamined our principal strategies and recommitted ourselves to our core private label and food service businesses. As a result, we have pruned non-strategic and nonproductive assets from our portfolio.

These 4 initiatives have brought immediate and substantial change to both Bay Valley Foods and TreeHouse. Our task now is to stabilize our core pickle and powder business, regain lost margins, and to prepare for further growth via acquisitions. That is our strategic agenda and operating mandate for 2006.

David Vermylen will now give you an overview of market conditions and our top-line sales and marketing performance.

David?

Thank you, Sam, good morning, everyone. I’ll briefly cover the top-line results.

As you might recall from our third quarter conference call, we reported that net sales in the month of September and into October were soft, which resulted in our taking down our top-line forecast for the year. The good news is that we were able to recover from a below year ago October with good growth in November/December, resulting in the total quarter being up 2.8%. A modest amount of the November/December growth was due to some retail nondairy creamer customers buying in prior to the price increase. I’ll provide more detail on our pricing in a couple of minutes. While a 2.8% growth for the quarter was good, the higher growth rate in November/December was a good turnaround from a difficult September/October. For the year, total net sales were up 1.9%.

In looking at our key segments, despite being flat in October, the powder business was up almost 9% for the quarter. We estimate that the buy-in behind the price increase accounted for about 3% of the growth. Excluding our Cremora branded business, which we are de-emphasizing, as we focus on private label creamer, all segments of the powder business show good growth. Despite continued softness in the retail nondairy creamer market, as measured by IRI, our retail business showed good growth. We completed an analysis that indicates that only half of our total retail nondairy creamer sales with IRI measured customers and we continue to see good growth with non-IRI measured customers. We also had a nice turnaround in our ingredient business, which had suffered business disruption in the customer base back in the September/October post-Hurricane Katrina period.

For the year, our nondairy creamer business was up over 9%. For the quarter, our pickle business was down just over 5%, consistent with the full-year trend. The retail pickle market continues to be very soft, continuing a trend we saw back in September and reported on last conference call. Pickle and relish retail sales, measured by IRI, were down almost 7% in the quarter, but our retail private label share was equal to last year. For the quarter, our food service pickle sales were equal to last year and were up 1% for the whole year.

The rest of our business, which consists of aseptic cheese sauce and puddings, refrigerated dressings, liquid egg substitutes, and liquid creamer and some co-pack business were up over just -- up about 10% for the quarter.

As we mentioned on the last conference call, the rapid run-up in costs in the fourth quarter of 2005 and the cost outlook for 2006, required that we take a far more proactive and aggressive stance on pricing. Unlike branded companies, who can affect higher net sales and offset cost increases to raising promoted prices or reducing couponing activity, private label producers have to rely on list price increases. And we have to sell those increases in customer-by-customer.

While it was a big challenge for us, we have been able to implement price increases that will offset the input increases we forecast for the business. I give a great deal of credit to Bay Valley sales management for developing the rationale for these increases and working them through with our customers. Most of these increases are taking effect in the first quarter of this year. We do recognize the private label and food service is often a big business and the price increases can trigger bids and challenges across the year.

We have a very aggressive cost reduction program in place to put us in a better bidding position long-term and we are prepared to step away from unprofitable business, at the same time, in working with our customers to negate the effect of price increases with supply chain solutions. Just 2 weeks ago, I called on a major food service customer, where we presented a distribution solution that will reduce the impact of our price increase by 35%.

On our last conference call, we spoke of the need to improve our visibility into the business, given the surprises we experienced in the third quarter related to crops and powder production. Our visibility into the business has improved significantly and we have made a number of changes within the Bay Valley senior management organization that will take us to an even higher level.

We are cautiously optimistic about 2006. We believe that our pricing and cost reduction programs are well balanced and will provide margin recovery but recognize that bids will take place and we will have to deal with them. We’ve got the Bay Valley organization well focused on a select list of key top-line and cost-saving initiatives and know we have a new organization in place that will accomplish those objectives.

I’ll now turn it over to Nick.

Thank you, David. I will cover fourth quarter results, and our new CFO Dennis Riordan will discuss our guidance for 2006.

The highlights and headlines for the fourth quarter are, as expected, operating margin slipped further, as cost inflation raced ahead of pricing. Sales were stronger than expected and we took write-downs related to the closure of the La Junta, Colorado pickle plant and some trademarks. What I will do is walk you through the P&L to describe results for the quarter.

Starting with net sales, they were up $5 million, or 2.8%. If you jump down to the segment information, you’ll see that powder was up a strong $6.1 million, 9%; and pickles were up $4.4 million. The balance of the increase was primarily in refrigerated products, where we are benefiting from a co-packing arrangement for Dean Foods.

Our gross margins slipped to 19%, 19.0%, from 21.6% a year ago. Gross margin was 19.9% in the third quarter, and 20.9% year-to-date. So, clearly, we have had a deteriorating margin situation this year, driven by ongoing cost increases.

Energy-related costs, natural gas and oil, have affected glass and resin-based container costs, as well as factory operating and freight costs.

G&A costs increased by $4.5 million versus a year ago. This reflects the TreeHouse corporate costs, as well as higher costs at Bay Valley, as a result of being separated from Dean Foods.

For your convenience, we broke out stock-based compensation on the income statement. FASB 123R expense for the quarter was $4.8 million, reflecting our adoption of this accounting standard in the third quarter and our relatively high level of this cost.

Other operating and expense net for the quarter is $14.5 million. This covers all the write-down activity. The details are as follows and these numbers are pre-tax. There was $9.9 million associated with the previously announced closure of the Company’s La Junta, Colorado pickle manufacturing plant and distribution facility; basically, to write down the asset values to market. There was also $4.6 million of charges to write down the value of certain trademarks, reflecting the Company’s strategic focus on private label instead of branded products.

Our reported operating income, or EBIT, was a loss of $8.0 million. If you add back the FASB 123R expense of $4.8 million and the other operating expense of $14.5 million, you get $11.3 million of EBIT on a comparable basis to last year’s $13.9 million. The comparable quarter-over-quarter decline is thus $2.6 million.

Our reported loss from continuing operations was $5.6 million. If you tax effect the FASB 123R charge and the other operating expense, and pull those 2 items out, you get to $5.8 million of income on a comparable basis, or $0.19 per diluted share, versus $0.28 a year ago.

For the full-year 2005, net sales came in at $707.7 million, a 1.9% increase over 2004, again, with pickles down and powder up. Full-year gross margin came in at 20.9% versus 22.6%, a slippage of 170 basis points. Reported EBIT was $28.6 million. If you add back the FASB 123R expense of $9.6 million and other operating expense of $21.4 million, you get to a comparable operating income number of $59.6 million, or 8.4% of net sales.

Income taxes were recorded in the fourth quarter, so as to bring the full-year 2005 tax rate to 55%. This includes the effect of the spin-off transaction costs for the year of $9.7 million, which are not tax deductible. If you exclude this item, our effective tax rate was 40.8%. At the margin, our effective rate is 39.5%. The reason for the higher actual rate this year was due to some catch-up items running through this year’s tax provision.

Continuing earnings per diluted share are reported as $0.39 for the year. Excluding other operating expense and FASB 123R, earnings per share were $1.11, which is in line with the guidance that we gave on last quarter’s call.

That’s all I have and I will turn it over to Dennis.

Thank you, Nick. I will now cover the outlook for 2006. We expect that 2006 will continue to be a challenging year, with the pickle market being slightly down and the NDC market growing at a rate which will slightly more than offset the pickle decrease. Overall, we expect net sales to grow between 2.0 and 2.5% on an organic basis. We’ve made good progress in managing our internal cost structures and have put in place plans to pass on those increased input costs, which cannot be offset internally. As a result, we believe we will be able to maintain or slightly grow our margins in 2006.

These price increases, combined with good management of our internal cost structures, we expect to see full-year earnings per share on a fully diluted basis finish between $0.81 and $0.86 in 2006, compared to $0.39 in 2005.

Please keep in mind that the EPS figures I’ve just discussed include the effects of restructured costs and plant closings, which amount to $0.22 a share in 2005, and will total $0.05 a share in 2006, as we complete the closure of our La Junta plant. In addition, the EPS figures include the cost of implementing statement of Financial Accounting Standard 123R, share-based payment, in 2005, which amounted to $0.18 per share and a full-year of such costs in 2006, which should be about double the 2005 cost, because our implementation was effective with the listing of the Company at the end of 2005.

Finally, the 2005 figures include $0.31 per fully diluted share in transaction costs, relating to our spin-off from Dean Foods in 2005. These costs will not recur in 2006. If all of these items were added back, fully diluted EPS for both 2005 and 2006, the EPS would have been $1.11 in 2005, and our projections for 2006 are in the range of $1.25 to $1.30 per share.

TreeHouse is currently free of bank debt. The capitalized leases will result in interest expense of about $1.3 million. Our effective tax rate will decrease from 55% in 2005 to about 39%. The large reduction in tax rate from 2005 to 2006 is due to the transaction costs relating to the spin from Dean Foods, which are substantially nondeductible for income tax purposes. As I stated earlier, these transaction costs will not recur in 2006.

In terms of investments, we are planning to increase our capital spending levels in 2006 to roughly $16.0 million from about $14.2 million in 2005. We will be emphasizing productivity projects at all of our plants and we’ll address capacity at our powder plants.

Depreciation and amortization will increase slightly from $17.0 million to $18.0 million, due to the additional capital spending.

In conclusion, we have addressed many of the issues in 2005 and are feeling very positive about our prospects in 2006. Actually, I’ll look for 2006. I’ll now turn it back to Sam.

Thank you, Dennis. Before we open for Q&A, let me summarize our strategic goals for the coming year and the operational imperatives that underlie them.

In 2006, we intend to first increase core operating earnings by 10% or more. Next, stabilize our Bay Valley Foods platform. Thirdly, generate steady predictable results. And lastly, expand our dry product space through acquisition.

In order to achieve these goals, we must undertake the following. To offset cost inflation with price increases and improve supply chain productivity in order to regain margins. Secondly, to stabilize Bay Valley Foods operations and leverage its market leadership in private label, food service, and industrial channels. Thirdly, to stay focused on our core private label and food services businesses, to the exclusion of secondary brands and other marginal opportunities. Next, redeploy the supply chain assets to increase pickle asset utilization and to expand powder volume. And finally, add a third product category, via acquisition, to accompany pickles and powder in order to expand our dry products platform.

Stephanie, we will now take their questions and comments.

[Operator Instructions.] Terry Bivens, Bear Stearns

Sam, I guess this one’s for you. Just on the topic of acquisitions, which seems to be topic A here. First of all, I thought at the very end there you said -- you used the language “expand your dry product offerings.” Would that appear to rule out, for example, going after a private label soup acquisition or something of that nature?

Well, Terry, we would -- the key is here that we are looking at businesses that fit well into the current Bay Valley Foods platform. And among other things, that means that we need to -- the products should be shelf safe and ones that can be shipped in conjunction with other products. And that opens up a whole array of the center store product categories. I won’t comment about a specific category, other than to characterize those that fit in that general description as the ones that we are -- have our highest priority.

And just in terms of the timing, I guess implicit in your remarks, you are looking at doing something this year. Do you think, knowing what you know now, looking at the multiples, that will be a first half or a second half event? Which do you think is the higher likelihood there?

Terry, it will, clearly, happen in the current year. And beyond that, I can’t comment about specific timing. I will say that we have focused, since the third quarter results, primarily on our operations. As I indicated, we have become fully immersed in the details of pickles and powder. And while we lost some time in this effort, and I would believe that we had lost no ground, and that the market is still something that we regard as one that will generate -- manifest opportunities for us.

Okay. I was just sorry to see you guys weren’t on the agenda for TreeHouse. Maybe -- or for Cagney rather. So, maybe next year, I guess.

I hope so. Thanks.

Andrew Lazar, Lehman Brothers

Just wrapping back around to some of the comments on pricing, having -- I think the comments were having taken successfully sort of at least initiated some of the price increases at retail and I guess in food service. Some of the, I guess, concerns now going forward, and to get back to your point around enhance visibility would be sort of the consumer’s sort of response to some of this pricing. Is it -- really it’s just going to be effective 1Q I understand, so it’s probably a bit early, but what is your sort of sense on that? Because you all putting out a somewhat, as you’ve mentioned, kind of cautiously optimistic view for the year and I’m trying to get a sense of how much you’ve built in, in terms of flexibility, or what, if any, kind of consumer reaction, even if it’s in the near term, might be to some of the pricing?

Sure, Andrew. This is David. I think that we certainly don’t have a read yet on consumption, but I think that the key is for us, looking both at pickles and nondairy creamer, are our current price gaps versus the branded leaders. And the price gaps, especially on the creamer side, are significant. So, we think that there is some headroom there that the consumption effect will be modest. I think it has -- the pricing has more to do with what I mentioned, the visibility, the increases can result in more bids and challenges. I think that’s where we’re really -- we’re primarily focused in that area.

And it is safe to say that just given the cost environment that primarily most sort of, whether it be branded or other private label players, and I realize the big business will establish some of this, but I have to imagine others are obviously feeling the same pressures. Is it your sense that the window is at least now more open for others to sort of make similar adjustments to pricing? Maybe in pickles it’s tougher, because I realize there is excess capacity and whatnot in the industry, but generally speaking.

I think so. I think that the window was more open in the fourth quarter, given the escalation, but I think where the opportunity is for others, especially on the branded side, is in their adjustments of their promoted prices and their coupon activities in order to have greater net sales realization.

Right.

And we’re seeing that.

Okay. And I guess just 2 quick things. One would be, have you, in terms of the big business and the reaction there, would there be any difference to that, whether we are talking about your food service and industrial business versus the retail side, in terms of the capability to sort of maintain your business in a more consistent way?

Well, in certain parts of the business, and very much saw on the industrial side, a lot of the pricing is adjusted quarterly or semi-annually based on input cost changes. And I think that both the food service side, as well as the retail side, face periodic bidding, probably more so on the retail side.

Okay. And then last thing is just in terms of your guidance and the way you are implementing pricing and such, is there -- perhaps, if there is an ability to give a little more color around how you think the year may flow from a quarterly perspective? In other words, is there likely to be a SKU -- I assume you take a little more time for some of the cost initiatives and the pricing that sort of start to build in. Is that a safe assumption and is that how you think kind of the earnings acceleration will flow?

This is Dennis Riordan. Yes, you are right. The price increases will come -- are just starting to get into play. As we noted, the La Junta plant was being shut down, so I expect that it will be a gradual improvement through the year. It won’t be happening immediately.

Robert Moskow, Credit Suisse

In third quarter, you guys admitted that you got a little blindsided on the cost side. What have you done to plan for 2006 in terms of your hedging and the contract for energy and packaging? How good is your visibility to your cost side for 2006?

Robert, this is Sam. I think that we have excellent visibility in that what we established was a component-by-component analysis of all of the inputs on our major products in both pickles and powder, and, in fact, used that analysis, as David indicated in the discussion of price increases with our customers. That analysis is updated monthly so that we can see what replacement costs are on a 30-day cycle. In addition to that, we have consolidated a series of 4 separate purchasing, procurement, crop planning, and manufacturing sessions into a single supply chain overview, which Gary Walsh, our SVP of Operations, and the Manufacturing Logistics teams go through in detail every month.

We have, in some instances, taken forward coverage. In other instances, found ways to hedge our requirements through our suppliers and have a very up-to-date and complete picture at the end of every month.

But when you say you have an update picture every month, does that mean that you have contracts in place that have established a fixed price for things like packaging?

We have a number of different procurement arrangements, to include those that are fixed, going forward, as well as ones that the variable costs are tied to other factors, including the component input costs of those materials. So, there is a whole array. I think the most important finding -- message here is that, as I’ve indicated, we are deeply immersed in the detail here and have put together a series of planning and control measures, to include those that I’ve talked about that give us, not only visibility but because of looking at replacement costs, early warning about what’s anticipated going forward.

One last question. One of your competitors said that their volumes essentially hit a wall at the end of December, after they took pricing. Did you see a similar type of thing and did it impact your January at all? January is done. Is there anything you can tell me about how January is? On top of that, we’re seeing a lot of grocery store data that seems very, very weak, considering the warm weather in January.

No. We actually feel very good about how we’re starting the year and that the momentum we saw in November and December appears to be holding up for us.

Excellent.

We’re encouraged.

John [Sinsini], Wachovia Securities

Could you comment a little bit more, Sam, about the acquisition environment? I know you commented a little bit, but specifically the funding environment remains -- seems to be softening a little bit. Maybe, the hope is, I think, from a lot of us that makes good strategic buyers like you a little bit more able to get some deals printed. Just from what you’re hearing and the talks you are engaged in, is it getting any better? Is it easier from an acquisition standpoint?

Well, I think the circumstances are still quite favorable for us. There have been small changes in the financing markets. Key to that is that we have -- we arranged at the date that we became public a $400 million line of credit on quite favorable terms.

And in addition to that, to go beyond your specific question, as one looks at private label and food service, we see those still as favored opportunities in the whole of the packaged foods universe. And as we have straightened out and corrected operating conditions at Bay Valley Foods, we continue to see that we will have the advantage of that presence and the synergies that come out of it -- come from that situation as being a unique advantage for TreeHouse.

Interesting. Now I guess if I could follow up a little bit, Sam. I was speaking specifically, I’m aware of the opportunities being good for you, I was speaking specifically about competition from a lot of the financial sponsors out there who are making it, I know, very difficult for some of your competitors to do deals they otherwise would. Have you seen any change in that competition level of interest in the opportunities that I think you have some strategic edge in?

Well, clearly, it’s a very competitive landscape. However, there is a preference, particularly on behalf of financial sponsors, to find those opportunities that offer rapid growth and they also have a predilection for branded foods and the gross margins therein. So, while we face a very competitive landscape, it is one where, as these opportunities come up, it’s ones that we are most interested in, or are seeing in a slightly different light by many who would attend other auctions, particularly for rapidly growing branded products. It’s important here that you go back to our statement about staying true to our strategy and making sure that we focus on the opportunities that give us the most return.

Thanks for that. Now, finally, just on the same subject, you mentioned dry goods. And you thought that was interesting. I know you talked about that relative to the private label soup business, but casting the net a little bit more broadly, I mean, what would it take for you to consider other acquisitions out there that were outside dry goods, maybe not as synergistic? If there was a real compelling valuation opportunity and it was a major category, let’s just say.

John, this is David. I think it would be, for outside of the dry grocery arena and therefore looking at either [inaudible – clearing throat] or frozen, it would really be something that we see as a new platform business for us, most likely operating from an operations sales marketing perspective independent of Bay Valley. But we would not shy away from looking at those kinds of opportunities, but right now we think that the number one opportunity for us is in the dry grocery center of the store area.

John McMillin, Prudential

I’m happy there is no more bad news. I think the only thing surprising, Sam, was that Dennis didn’t have an Irish accent. We’re stepping in the right direction here in the conference call, even though I would have preferred a little bit of an Irish accent. Just in terms of the pickle price increase, did you quantify what you are trying to get through in that area?

We have not communicated the increase. It really is designed, John, to offset the input cost increases.

I’ve seen Mt. Olive has actually lost a little share recently. Have they taken pricing? Has Vlasic taken pricing?

What we have seen is from Vlasic some minor pricing on a number of SKUs, but very limited. Where we’re seeing more pricing is in sort of a price realization, John, that we think is coming from promoted price increases.

Okay, but, obviously, the visibility there is less than in creamers and in other areas, is that fair?

John, what do you mean by the visibility?

Visibility that the pricing will go through and your volume won’t be worse off.

Right. I agree with you.

And just, I don’t mean to get into trans fats because it doesn’t appear like people care that much, even though it’s on the labels, but in the nondairy creamers, you have to now label the trans fats on them. Have you found that any kind of issue whatsoever to the category? And don’t the products still contain trans fats?

I think -- they do, John, and we are doing -- following all of the requirements, but I don’t’ think that -- I think those people who are very concerned about trans fats are not going to be the logical consumers for powdered nondairy creamer.

Well, you can’t read it. The little nondairy creamer is so small anyway. So, I’m not sure if you have to label it, how much room you have to label it. I’ve looked at them. I haven’t really seen -- but there is a rule that you’ve got to label the trans fats, so I just wondered if that was -- you have not seen any impact?

No.

Stefan Lumiere, Oscar Gruss & Son

Just a quick question. Most of my questions have been answered, but with regard to your guidance for ’06, was that factoring in, I guess, the drop in natural gas prices that we’ve seen a 43% drop off the average you had in the last quarter?

That factors in the seasonal adjustment, as it’s coming down to a degree, yes.

Second question. With regard to the acquisition buy, I guess you guys have expanded on that pretty much, but in terms of the partners that you’ve spoken to over the past several months or quarters, have you singled out anybody in particular or any type of product in particular, or have you looked at several partners or are you still in the kind of the initial stage of that right now?

The only comment we can offer to you is go back to the acquisition filter that we described several months ago. And David and Nick led the development of that filter and we have identified approximately a half a dozen criteria by which we assess these opportunities. With regard to specific partners or transactions that we’ve considered, I’ll only say that we are -- we see favorable circumstances to our programs and are engaged in opportunities that are of our own development, as well as those that come in through the world of investment banking.

One more question. With regard to the co-pack remedy of Dean Foods, when does that expire?

The middle of 2007.

Patrick [Jogosian], [Spot Capital]

Sam, I remember at the time of the road show you said that you largely operate without contracts. Can you just take me through what percent of the revenues operate without long-term contracts?

I’ll have to tag team this one with David. I don’t think we have a particular number, but it is customary in our largest channel, which is retail grocery, that prices and terms are established periodically and done so not via a contract but, in fact, once agreed upon, they are put into effect on a shipment-by-shipment basis.

I think, Patrick, in our retail and food service business, it would be very few actual contracts. In our industrial business there would be some. But, in general, it’s not a written contract, it tends to be more of a -- a lot of it through a bid process and a handshake.

Okay, so you just recently put in price increases and I guess at this point your customers would be looking to minimize their costs. And so you’re probably going to be facing an above average amount of bid activity in 2006. Have you assumed any contract losses in your ’06 guidance?

We’ve built our plan around some assumptions that there could be some lost business, but that’s all built into the guidance that Dennis took you through before.

And how much in revenues have you assumed you’d lose in ’06?

We haven’t quantified that, but we are comfortable that we’ll be able to achieve our guidance top line of about 2 to 2.5%.

Have you had to respond to any RFPs so far after the price increase?

No. We expect that if any of those are going to take place, it will be later in the spring, as you start heading into the key pickle crop season. But I think it’s one where in this industry you always have to be on top of it customer-by-customer in terms of where they are.

What gets you comfortable that you would be able to be price competitive on this bid activity?

Well, in both pickles and powder, we have some cost advantages that relate to scale, which are critical in both businesses. And we are working very closely with a lot of customers on how we can take costs out of the supply chain. As I mentioned in my comments, with a very large food service customer, that we have to take a pretty healthy price increase, this was back in November/December, that November/December time period. I sat down with that customer a couple of weeks ago after the whole -- with a couple of the Bay Valley key sales managers, and the Bay Valley group, business team, had gotten together and really came up with a very creative supply chain solution that would help reduce the distribution expense for that customer. And we were, with the price increase, we were, obviously, nervous that we might lose some of the business and we walked out with that customer congratulating us on the initiative we had taken and we think it’s going to open the doors for additional opportunity.

And just as far as Mt. Olive, I believe they are your primary branded competitor in most of your channels, what did they do relative to pricing?

The only thing that we have seen is an area of their retail price is floating up, and that’s most likely due to changes in promotion activity. But Vlasic is really more of the brand leader than Mt. Olive. And we’re seeing some promoted price increases on their part as well.

By promoted, are those permanent or temporary?

I think it’s more -- it’s hard for us to say what their strategy is, it’s just that the average retail price has been growing, despite not seeing list price increases.

And so has the price spread between brand and private label compressed now?

No, it’s pretty much holding constant.

And why the increasing CapEx? Where are you adding capacity?

The key area for us is that we are operating at a very high level of utilization on our nondairy creamer business. And so we have put into the capital budget for this year increasing our capacity in that area.

Last question. Someone, a question earlier on the call, said there is an excess of buy situation in private label pickles. I guess, what is your concern that if some of these struggling competitors, they would under-price the business aggressively in order to just stay in business?

Well, there is excess capacity in the industry, and it’s not just private label, it’s in the industry in total. And a key thing for us is rationalizing our own manufacturing footprint so that we are not as vulnerable to others making those kinds of decisions. If someone wants to take zero margin business just to cover fixed costs, we want to be in a position where they can do that. And that the business we have is generating appropriate returns.

Are all your competitors in private label privately owned companies?

Not really sure, as I think through, because, again, we have a very high share of the private label market, so I have to look at the total pickle market. But the total pickle market tends not to be in the hands of publicly-traded companies, except, obviously, for us.

Right. So, their profitability metrics on this bid activity may be very different than yours.

Could be.

[Operator instructions.] It seems we have no further questions at this time. I would like to turn the call back over to Mr. Sam Reed for any closing remarks or additional comments.

Let me conclude with a few comments regarding the opportunities and challenges we at TreeHouse face. Like the entire packaged foods industry, we are battling energy and other cost inflation on a wide front. We are also recruiting and training a new operating management team to lead Bay Valley Foods in the struggle. Our 2006 results, starting in the first quarter, will clearly demonstrate that we are meeting these challenges.

Conversely, the landscape for private label foods provides us with manifest opportunity. The cost environment may be harsh, but our prospects are excellent. We are in the right place at the right time with the right strategy and the right people. We will seize the opportunity offered by the growth of private label and food service in a consolidating industry to propel TreeHouse forward. We expect that this also will be borne out in the coming year.

Thank you all again for joining us this morning. We will be back in May.

Ladies and gentlemen, that does conclude our presentation for today. We do appreciate your participation. At this time you may disconnect.